Finding Your True Cost of Goods Manufactured

Cost of goods manufactured is one of the key subordinate calculations in
determining the total cost of goods sold for a manufacturing company.

The standard equation for calculating the cost of goods manufactured is simple:

the manufactured goods in process on your start date,

plus your direct costs (material + labor),

plus your manufacturing overhead,

minus your goods in progress on the end date of the calculation.

More complicated is the tracking and assignment of those costs.

One of the standard accounting methods for accurate
assignment is the use of a cost of goods manufactured schedule. There
are three major cost centers that are included in the schedule:

✓ direct materials used,

✓ direct labor, and

✓ indirect costs.

Direct Materials Used

Four numbers are critical to calculation of cost of
goods manufactured and they rely on sound materials management systems
to have an accurate starting point. These are:

✓ beginning raw materials inventory,

✓ cost of raw materials purchased,

✓ total raw materials on hand at end of period, and

✓ ending raw material inventory.

Direct Labor Used

This is perhaps the easiest to track. Standard
accounting practices and payroll records ensure that this is a simple to
acquire number. However, this should include not only direct wages paid
but the cost of benefits associated with the workforce involved in
production.

Indirect Costs/Manufacturing Overhead

This can be the most challenging information to collect. The parallel costs to the direct cost include:

With these values available, the bottom line solution is a simple case of addition and subtraction. The next step is calculating the cost of goods sold.
This interim step is valuable for decision making regarding cost
management strategies, but it is cost of goods sold that drives bottom
line performance and long term production decisions.